CSR - Much Ado about Nothing?
Part I: Shareholders first

April 5th 2020 - Edition #30

Why are many managers so hesitant to take a leap of faith and commit full-heartedly to corporate social responsibility (CSR) and sustainability efforts? What most justifications will typically have in common is the idea that “caring for stakeholders” is not always compatible with “caring for shareholders”. But is that really true? In Part I of this newsletter I’d like to talk first about why ‘caring for shareholders’ constitutes the dominant corporate governance logic of our times, and why it has come to serve as the primary basis upon which corporate investments are typically assessed. In Part II of this newsletter, out next week, I shift focus to the notion of “responsibility”, and ask whether “values” are truly an inextricable part of doing business.

“Shareholder primacy” is the idea that managers have a responsibility to prioritize and maximize value for their shareholders. According to shareholder primacists, shareholders are entitled to such preferential treatment (relative to other stakeholders) because they bear significant risk: shareholders invest funds into a business (without which it cannot function) but receive no guarantee of returns in exchange. In that respect, managers who deviate from their shareholder responsibilities (by investing in CSR for example) engage -to put it mildly- in theft (by diverting shareholders’ money towards non-core activities without their consent) and democratic subversion (by appointing themselves as ‘unelected’ social change agents in lieu of policymakers). Instead, argue the primacists, all stakeholders (society included) would be better off if managers are allowed to focus on what they do best (maximizing profits) so that they pass on the higher returns to their shareholders, who individually decide which social cause they would like to contribute to. 

A fundamental problem with shareholder primacy, however, is that when managers prioritize the interests of their shareholders above all else they inevitably downplay, if not violate, the interests of other stakeholders who have legitimate stakes in the business. This, in turn, can lead to corporate misconduct even when managers do not expressly intend to do so. Take the case of Nike’s labor practices in Southeast Asia in the 1990s for example. For Nike, the pursuit of shareholder interests led to an internationalization strategy that favored outsourcing production to emerging markets that were unconstrained by stringent wage regulations and safety standards. That strategy, once heralded as a textbook example of strategic location choice, backfired when American consumers realized that it would take an Indonesian worker an average of 44,492 years to earn the equivalent of Michael Jordan’s sponsorship contract.

But what about shareholders? As residual claimants, shouldn’t they be naturally incentivized to prevent corporate misconduct and socially irresponsible behavior from occurring to avoid legal and reputational penalties against their company? Not necessarily. Three recent insights from research are worth highlighting:

  • Not all acts of misconducts are equal: misconduct against secondary stakeholders (e.g. corruption) are less likely to be penalized than those against primary stakeholders (e.g. customers)
  • Penalties against corporate misconduct are typically short-lived
  • Misconduct is not always reported and/or investigated, meaning that a lot of irresponsible behavior is taking place and is going unpunished.

That companies are not always strongly penalized when they engage in misconduct suggests that some managers will perceive misconduct as merely a business cost worth incurring while pursuing shareholder interests. It also means that it is inevitable that shareholder primacy will inflict harm on some stakeholders, particularly those who lack the capacity to mobilize and articulate their grievances against the firm. It is for this reason that ethics and values must be an integral part of managerial decision-making.

Please find a long-read of my article here and stay tuned for Part II of my article next week.

Omar El Nayal
Assistant Professor of Strategy
Católica Lisbon School of Business and Economics

The Center for Responsible Business & Leadership has the main purpose of contributing for Sustainability and Responsible Leadership to become part of the “way we do things in our planet”. Find out more here.

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